Daily Commentary - Posted on Sunday, January 22, 2012, 9:25 PM GMT +1

12 Comments


Jan Sunday 22

Complacency at Multi-Month High

Besides the fact that even betting on a one-day decline (leave alone calling a top) has been a receipt for disaster during 2012 (so far), complacency has set in (again) among retail investors.

On Friday, January 20, the VXO (CBOE S&P 100® Volatility Index) closed at a 6-month low, and the (annualized) 10-day historical (realized) volatility is close to a 9-month low.

Whilst some blog authors and websites are suggesting to stay alert, or that a top might be in, a far better (compared to betting on a stock market top) opportunity might be presented due to the fact that for a couple of years now a bunch of (leveraged) Volatility ETFs are available to the retail investor (complementary to CBOE volatility futures and options).

Table I below shows the VXO (CBOE S&P 100® Volatility Index) performance (since 1986) one week later, at the end of January (′at month’s end′), one month, two months and five months later in the event the VXO had not been this complacent over a 6-month period in January of a year (means the VXO had closed at a fresh 6-month low) in the past.

Volatility (realized and implied) almost always picked up shortly again (partly tremendously), and the VXO closed at a higher level one week later on 17 out of 18 occurrences, was up 1.0%+ at the end of January and one month later on all 18 occurrences, and higher 5 month later on 17 out of 18 occurrences as well.

(click on image to enlarge)


Table I
VXO (CBOE S&P 100® Volatility Index) posted a 6-month low in January

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Table II below shows the first occurrence (per year only). The VXO hit a 6-month low in January for the 10th time since 1986, and was always trading 10.0%+ above January’s 6-month low at some time during the then following month.

(click on image to enlarge)


Table II
VXO (CBOE S&P 100® Volatility Index) posted a 6-month low in January

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Conclusion(s)

January’s 6-month low with respect to the VXO (CBOE S&P 100® Volatility Index) might provide a favorable opportunity betting on implied (and historical) volatility picking up (possibly tremendously) over the course of the next couple of weeks and months.

Have a profitable week,

Frank


Disclosure: No position in the securities mentioned in this post at time of writing.

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Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments.

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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

(Data courtesy of MetaStock and Pinnacle Data Corp., and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

Comments (12)

 

  1. MM says:

    looking for a way to trade volatility, I found the ETF “VIXY” However it underperforms the vix/vxo quite badly. Do you know any other vehicles? http://finance.yahoo.com/charts?s=%5EVXO#chart2:symbol=^vxo;range=2y;compare=vixy;charttype=ohlc;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

  2. Tom says:

    How do you get a trigger day on January 3rd 1986? The oldest data I can find for VXO starts on 2nd January ’86 hence no time to establish a 6 month low. Obviously this doesn’t impinge on the results much but I’d be interested to know.

    Thanks,

    Tom.

  3. William says:

    Frank,
    These seem like they are unusually strong trends. Do you agree? Is this an all in situation In Your opinion?

    Are you concerned that this has been anews driven market of late and does that alter your wager?

    A fan,

    William

    • TradingTheOdds says:

      William,

      from my point of view, its a liquidity driven market, backed by positive earnings (Apple, …), and some emotional blunting with respect to daily news from the credit crisis (Greek, Italy, …). It’s like the bandwagon effect: The train (rally) has left the station, and nobody wants to be left behind …

      Best,
      Frank

  4. Bill says:

    Frank,
    If playing the vix or vxx up, isn’t that opposite or contrary to what you are seeing/saying in the posts of the following two on the 24th and 26th?

    Which is stronger?

    Or is the volatility of a rising vix more likely to play out in February? Was this post a little to early and good time to get in?

  5. Bill says:

    Frank,

    Do you have a problem holding vxx of up to 5 weeks?

    William

    • TradingTheOdds says:

      Bill,

      it depends. Unfortunately VXX is based on VIX front month futures (first and second month), not the VIX itself. Sometimes there is a hefty premium (traders are already anticipating a short-term rising volatilty). In this event I’d stay out.

      Best
      Frank

  6. William says:

    Frank,
    Thanks for you candor. I follow spy and a few stocks closely. Not nearly as familiar with the vix.

    Do you think there are signs of a spy pullback?
    Bill

    • TradingTheOdds says:

      William,

      check my latest posting. With respect to historical probabilities and odds, a favorable buying opportunity might be provided on today’s (Friday’s) session. But any pullback may be short-lived only.

      Best,
      Frank

  7. GT says:

    VXO : Fri. Mar9 : 15.37, new low of the year today 14.83, lowest level since July 2011, 8 months ago,

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